Oil Alert! Fears Grow That Rising Price Will Kill Economic Recovery; ENERGY ANALYSIS

Article excerpt

Byline: Robert Lea

INFORMED City opinion has it that last year's extraordinary spike in the oil price was to blame for the economic crisis we find ourselves in and that rising fuel costs arguably hurt companies and consumers far worse than the credit crunch.

The price of oil, which in July 2008 peaked at $147 a barrel, sent many companies' operating costs soaring. That meant services and goods became more expensive, which consumers were loathe to pay for and sent corporate revenues into freefall. It was only when this was overlaid by the collapse of the banking system that what was already an acute crisis became the worst recession in 80 years.

So what of the oil price that has spiked once more, hitting $75 a barrel? Forget a V-shaped bounce-back economic recovery and instead, say some, look at the V-shaped oil price graph. The harbingers of doom are flocking and analysts who made their name predicting last year's superspike are chirping again about the $100 barrel.

But worryingly there are at least 10 reasons to fear a surging oil price - and what that means for motorists, householders' energy bills and the price of goods in general:

Confidence

The economic and corporate worlds are a more confident place than they were. The Bloomberg Professional Global Confidence Index has jumped to a near two-year high with optimists outnumbering pessimists. That does not necessarily translate into corporate well-being or investment but it is a change of mindset.

The return of risk

Fund managers are reporting a nascent trend in investors looking for something more. Months of parking money in safe havens is being replaced by a return of the appetite for risk and the search for yield. Just look at the extraordinary run up of world stockmarkets in recent months.

US tanks are emptying

Oil inventories in the US have been steadily declining: the surplus of crude in storage has fallen to less than half the peak reached in April. If America starts importing again the opikl price will go up again - it doesn't fall when Uncle Sam comes buying.

Growing global consumption

Predictions of a collapse in global oil consumption have weighed heavily on the market for months. Those forecasts appear to have reached their nadir after the International Energy Agency reversed its previous options and raised its demand outlook for this year and next. The world, says the IEA, will need 85.25 million barrels of oil a day next year, 70,000 barrels more than previously estimated.

China and others

China, the world's largest emerging economy, has the power to move prices. In late spring when China was stockpiling oil reserves the price surged from below $50 to more than $70 in six weeks. The same will be true when India, Brazil, Mexico, Turkey, Indonesia and Vietnam begin re-emerging, consuming more than they produce.

Peak oil or the days of shooting fish in a barrel are long gone

Peak oil theorists who reckon the world is running far shorter of hydrocarbons than currently feared have been spooking the market for years. However, the picture is not all gloomy. BP jumped yesterday after it announced a "huge" oil find in the Gulf of Mexico, containing up to three billion barrels.

But peak oil buffs were quick to dismiss the BP find as little more than a drop in the ocean. Recently, US analyst Bernstein Energy published a research note entitled The Days of Shooting Fish in a Barrel Are Long Gone. "Quite simply, the world has forgotten how hard marginal production [ie the difficult fields] gets hit in the years following an industry downcycle and a reduction in capital spending," it argues of the global producers outside Opec. …